- Sources and uses of funds
28.1. By comparing the current balance sheet with the previous balance sheet, the
statement of sources and uses of funds can be prepared.
28.2. Sources means, where does the money come from. Uses means, how such
new money has been used.
28.3. The new funds or money may be due to the
(i) Net profit i.e., after the depreciation
(ii) Depreciation; (Note: - because of depreciation money will not actually
Leave the business)
(iii) New shares subscribed
(iv) Fixed assets sold
(v) Fresh loans availed.
28.4. The funds might have been used :
(i) To pay dividends
(ii) Procurement of new fixed assets
(iii) Loan re-payment
(iv) To raise net working capital for more liquidity.
28.5. Sources of funds must always be equal to uses: to the extent that it is not
used, there will be an increase in the liquidity. There will be an increase in
the net working capital or increase in the gap between the current assets and
current liabilities.
28.6. The sources and uses of money statement should be attached to the balance
sheet. The mere rise in company’s money may not be indicative of the
health status of the company. The health of the company depends on how
the money is used. If it is used for productive operations or for the
expansion of existing plants or for purchase of new machinery or for
modernization, future production may increase. If the new money is spent,
for example, for the construction or for the renovation of the houses of
directors, it may not improve production. Therefore, to read the financial
health of a company, one has to analyze how and for what purpose has the
money been spent.
